DismalScienceBlog

A blog discussing current economic news and events though a political perspective.

Wednesday, October 1, 2008

As the Bush, Paulson, Bernanke and crew scramble to make another attempt at passing a bailout bill,one wonders why passing the risk and potential reward (unlikely, that) of these mortgage-based assets to the Government would solve the problem.

Yes,the U.S. Treasury has deeper pockets thanprivate parties.But with a 350B$ price tag,or 700 B$,even the U.S. fiscwill have indigestion.Ifthe assets can only be liquated by the Treasury (or by as-yet-unnamed fiduciary) at a steep discount from the purchase prices,the shortfall will be monetized in deficitsthat will exact the cost from the economy.The burden of the bad assets will be only shifted from the current mortgage-based asset holders toother shoulders.

How the bailout might work to the benefit of all?First there is the considerable benefit of remaking a market for these assets again….even ifthey must sell at a loss.

Next would be by avoiding (or quelling) a panic.The panic avoided would be the overreaction by the markets to the souring housing market and the mortgage-derivative securities.

Sunday, September 28, 2008

I thought the Congress and Administration did a Yeoman job in banging out a response to the market crisis. They generally put aside, for the moment, the question of "WHO CAUSED THIS BUBBLE?". They addessed a quick solution, rather than underlying causes. The recriminations will come later.

The current proposal, which narrowly failed this morning in the house vote,had some input from all the main parties: Putting up cash though the Treasury, as the Administration had proposed. Limits on Golden Parachutes and equity stakes in any saved companies, as demanded by the Democrates. Some attempt at protections for taxpayers' money, demanded by both parties in the House. The transparencyrequirements were a good feature.Whether the proposed bailout would have worked, long term, was problematic.It would be been effective in quelling the panic in the Markets. The ultimateoutcome would have been dependent on the scope of the problems in themortgage markets. This is still playing out.

If the Markets continue to swoon, the lawmakers will be obliged tofashion a revised bill that can pass.